A company sells Gizmos to consumers at a price of $117 per unit.The cost...

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A company sells Gizmos to consumers at a price of $117 per unit.The cost to produce Gizmos is $27 per unit. The company will sell15,000 Gizmos to consumers each year. The fixed costs incurred eachyear will be $190,000. There is an initial investment to producethe goods of $3,400,000 which will be depreciated straight lineover the 10 year life of the investment to a salvage value of $0.The opportunity cost of capital is 6% and the tax rate is 34%. Whatis operating cash flow each year? answer 881200
b) Using an operating cash flow of 881,200 each year, what isthe NPV of this project? how do you do part b?

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4.4 Ratings (870 Votes)

a]	INITIAL INVESTMENT:
	Cost of the new machine	$ 34,00,000
	Initial investment	$ 34,00,000
	OPERATING CASH FLOWS:
	Sales = 15000*117 =	$ 17,55,000
	-Cost of production = 15000*27 =	$ 4,05,000
	-Fixed costs other than depreciation	$ 1,90,000
	-Depreciation = 3400000/10 =	$ 3,40,000
	=NOI	$ 8,20,000
	-Tax at 34%	$ 2,78,800
	=NOPAT	$ 5,41,200
	+Depreciation	$ 3,40,000
	=Annual OCF	$ 8,81,200
b]	PV of annual OCF = 881200(1.06^10-1)/(0.061.06^10) =	$ 64,85,709
	Less: Initial investment	$ 34,00,000
	NPV	$ 30,85,709

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In: AccountingA company sells Gizmos to consumers at a price of $117 per unit.The cost to...A company sells Gizmos to consumers at a price of $117 per unit.The cost to produce Gizmos is $27 per unit. The company will sell15,000 Gizmos to consumers each year. The fixed costs incurred eachyear will be $190,000. There is an initial investment to producethe goods of $3,400,000 which will be depreciated straight lineover the 10 year life of the investment to a salvage value of $0.The opportunity cost of capital is 6% and the tax rate is 34%. Whatis operating cash flow each year? answer 881200b) Using an operating cash flow of 881,200 each year, what isthe NPV of this project? how do you do part b?